Lithium Prices Set To Jump As Tesla Doubles Global Battery Production

Tesla fired up the gigafactory in the first week of 2017, which could mark a turning point for the energy storage industry.

The gigafactory in Nevada will begin mass production of lithium-ion batteries for the use in both Tesla’s Model 3 electric vehicle as well as its energy storage systems. Tesla, and its partner in the gigafactory, Panasonic, plan on hiring 4,000 people to work at the factory in 2017. By 2018, Tesla predicts that it will be churning out 35 gigawatts of lithium-ion batteries per ear, equivalent to what the rest of the world produces combined. In other words, this single factory will lead to a doubling of global battery production capacity next year.

Up until now, battery production has been dominated by companies outside the United States. An estimated 88 percent of battery production in 2015 was located in China, South Korea and Japan, dominated by companies like LG Chem and Samsung. That market share distribution is set to abruptly change with the inauguration of the gigafactory.

Ramping up battery production to such a monumental degree will certainly lead to cost reductions for batteries. Increased automation, standardization, economies of scale, learning-by-doing, and a lower capital investment per watt-hour of production will likely lead to industry-wide cost reductions. Related: Oil Edges Higher As Core OPEC Members Initiate Cuts

Still, the obstacles for Tesla are formidable. Tesla has promised to begin shipping the Powerwall home energy storage system within the next few weeks; it has promised to sell 500,000 Model 3 cars by 2018, which will only be possible with the blistering pace of battery production at the gigafactory; it forked over a lot of money to purchase SolarCity; and it has a small margin of error with Wall Street on the financial side of the house after repeatedly disappointing shareholders.

Tesla has been notorious for missing deadlines, but has impressed the market in recent months. It delivered a 20 megawatt energy storage system for a California utility in just a few months, a project that would have normally taken years. It has also accelerated plans for the gigafactory, hiring people well ahead of schedule and promising to ramp up output years earlier than originally planned. “We believe Tesla battery sales are accelerating," Baird analyst Ben Kallo, told Bloomberg. “The ramp of Tesla Energy and Model 3 production could exceed expectations.” Baird has rated Tesla as one of the best stocks of 2017.

The doubling of global battery production capacity could not only lead to an acceleration in the EV market, but it is also leading to a massive bull run for another sector: lithium. According to the Financial Times, an electric vehicle uses 4,800 times the volume of lithium as a smartphone, so the acceleration of EV adoption is leading to very tight supply conditions for lithium. Lithium demand could rise by 16 percent annually through 2025, which, according to Morningstar, would be the fastest growth rate out of any other commodity in the past century.

Lithium prices exploded by 60 percent last year, and have tripled over the past three. While there are four main lithium miners in the world – SQM, Albermarle, FMC and Tianqi Lithium – smaller miners are starting to multiply. More than a few have popped up in Nevada, which is home to rich lithium deposits (it is not a coincidence that the Tesla gigafactory is located there). The FT argues that there is no shortage of global lithium reserves, but that mining lithium is technically difficult, which means miners could struggle to keep up with demand. “Supply is tight, you’re going to need more supply,” Richard Seville, CEO of Argentina-based lithium miner Orocobre, told the FT. “But the challenge is, things take time and often the supply response to demand is over optimistic.”

Lithium supply will be a pivotal factor in how quickly battery production can accelerate, which in turn, will go a long way in determining the rollout of new EV models. Last month, the U.S. saw its highest month ever for EV sales. At 25,000, EVs still accounted for less than 1 percent of the total auto market for the month, but sales are growing quickly, up 37 percent in 2016 from a year earlier. Tesla’s gigafactory could provide a jolt to those sales numbers in the years ahead.

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Is there a particular reason that you did not mention BYD.com as afaik the currently biggest battery manufacturer?

Joe on January 09 2017 said:

EV's are less than 1% of the auto market? And they had 37 % growth? Working the math, it would take over 10 years to get to 25% of the market. Plus each year of 37% growth would be harder and harder because of the volumes involved. Yes, I know, that's what they thought in the horse and buggy days.

Call me in 10 years. Meanwhile I do wish with them success. Don't forget to plug in your car.

Andy Kopac on January 09 2017 said:

Might be jumping for somebody else, BUT NOT FOR TESLA!!! Tesla locks in pricing on Lithium http://www.teslarati.com/tesla-locks-lithium-supply-gigafactory/